AFG announces $60m equity raise

In an announcement to the ASX, the aggregator announced a fully underwritten $60-million equity raising to be conducted via a $45-million one for 5.5 pro rata accelerated non-renounceable entitlement offer and a $15-million placement to institutional investors.

The equity raising will result in the issuing of around 52 million new shares representing approximately 24 per cent of existing AFG shares on issue.

According to the group, up to $55 million of the proceeds will be put aside to strengthen the capital position, provide liquidity and support growth in the AFG Securities lending book. It will use $5 million to ramp up its ongoing technology investment to support brokers to better engage with clients in the current COVID-19 environment.

AFG also said it will set aside $10 million for investment opportunities that may arise out of the current environment, which AFG might choose to pursue.

The aggregator said these proceeds will supplement its existing unrestricted cash of $52 million (as at 30 April), which is predominantly required for working capital purposes.

Commenting on the equity raise, CEO David Bailey said AFG is aiming to reinforce its balance sheet to enable the group to steer through the current market uncertainties.

“Our diversification strategy has been in place for a number of years, and the growth in AFG Securities has been a key pillar of that strategy,” Mr Bailey said.

“We are undertaking this equity raising to further strengthen our capital position in AFG securities to remain a long-term market participant and support its growth beyond COVID-19.

“Additional capital will also allow the company to continue to explore strategic opportunities to further diversify earnings.”

Mr Bailey noted that the COVID-19 pandemic could shift the way people conduct business in the short to medium term, and perhaps permanently.

“Equity raised will assist AFG to ensure our brokers are at the forefront of technology to support their customers, make their workflows more efficient, and accelerate the enhancement of our digital platform to drive competition in the lending market.”

“We are taking a longer-term view, and the equity raise will ensure AFG is well placed and well capitalised to maintain the momentum behind our business during this period of market disruption.” 

Volumes and commissions expected to soften

Looking forward, AFG reported it has experienced strong growth in lodgements, with the March quarter up 33 per cent on the same period last year, and added this trend continued into April.

AFG attributed the increased activity in the March quarter and in April to record-low interest rates and, more recently, refinancing activity as brokers helped borrowers strengthen their positions against the impacts of COVID-19 ahead of potential shutdowns and restrictions.

However, the aggregator said the settlement conversion ratio is expected to be lower in the near future, with settlements “subject to delay” given the impact of the COVID-19 environment.

Over the next few months, AFG said it expects residential settlements to fall from April’s level of activity, driven by a slowdown in broader economic activity, higher levels of unemployment and a potential decline in house price and sale volumes caused by the COVID-19 pandemic.

“As a result of this confluence of factors, AFG is anticipating settlement volumes and therefore upfront commission payments to soften in the coming months,” it said.

“Importantly, operating cash flow from existing trail commission arrangements on AFG’s $151.7 billion trail book originated by AFG mortgage brokers is expected to continue.

“Additionally, the majority of lenders have confirmed they will continue to honour trail commission payments on COVID-19 hardship cases for six months.”

AFG Securities’ existing loan book of $2.85 billion is expected to deliver good net interest income. However, AFG predicts loan book growth could likely slow over the next 12 months.

“AFG is anticipating it will require additional capital for AFG Securities to strengthen its strategic and competitive position, provide additional liquidity, support additional growth in facilities, and provide support for potential impacts of ongoing hardship cases to assist customers through the COVID-19 pandemic,” AFG said.

The group currently has a collective provision of around $1.2 million for losses, which it expects will increase for the 2020 financial year results.

It has reported that AFG Securities has not incurred any losses on non-lender’s mortgage insured loans.

Furthermore, AFG stated that it does not expect material losses if, as per general consensus about the market outlook, property prices decline by between 5 to 15 per cent.

“While the economic and residential property outlook remains uncertain, AFG is confident that the role of brokers who deliver choice and competition to Australian borrowers will remain critically important,” AFG said.

The Australian Competition and Consumer Commission (ACCC) announced this week it has set the date for its decision on the merger of AFG and Connective to 18 June.

This followed the news that the competition watchdog had delayed its decision regarding the proposed merger after AFG requested more time to argue its case for the merger following the ACCC’s consultation on its preliminary concerns.

[Related: AFG seeks to allay ACCC concerns]